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Five Things You Need to Know: All Gamblers Die Broke


The pain of losing is felt so much more intensely than the joy of winning.

1. All Gamblers Die Broke

"For why is gambling a whit worse than any other method of acquiring money? How, for
instance, is it worse than trade? True, out of a hundred persons, only one can win; yet what business is that of yours or of mine?"

-- Fyodor Dostoevsky, The Gambler

I'm a gambler by nature, and once, for a time, even by profession. It's a cruel and unusual occupation and few can walk away from it without a permanent hardening of the heart. There's no easy way to describe the occupation of gambling to those who have only pursued it as a sport. Just know that the adrenaline rush from winning is no match for the deeper, more subtle fuel losing provides. And, like any drug, the hangover, comedown, and aftermath inevitably subsumes the pursuit of those brief, spastic bouts of ecstasy, eventually replacing it.

All gamblers die broke; it's a cold hard truth, but not for the reasons most people think. All gamblers die broke because the pain of losing is felt so much more intensely than the joy of winning. Thrill junkies choose gambling for the intensity of the experience, and behavioral psychology long ago demonstrated that the mind's ability to choose rational thrills offering positive rewards over more intense thrills offering irrational, negative rewards is pitiful at best. We're simply not wired that way.

Which is to say, people don't lose because they can't win; they can't win because the feeling of losing is far more powerful and lasting than the thrill of a win. Think about that. I did as I was reading the sixth or seventh email in my box this morning touting a chance to gamble $50,000 on whether gold would close above $1,200 or below $1,000.

The nut of the thing is a guy named Peter Grandich is issuing "An Open Challenge" to what he says are "gold perma bears like Kaplan, Nadler and Soros" to bet him $50,000 that gold closes above $1,200 before it closes below $1,000.

Why anyone would accept this challenge, I have no idea. Why anyone would offer it, I know quite well.

Here's the thing: The gold market is liquid enough that if you want to bet 50 grand on whether it goes above $1,200 or whatever, I think it can handle your wager. The only problem is it will handle it anonymously. A public $50,000 challenge is fraught with emotion.

2. What Does Inflation Look Like?

A critical question, friends. What does inflation look like? How will we recognize it when we see it? We know we can't rely on nominal pricing changes -- because they'll just keep changing the bottle sizes.

Fortunately, the European Central Bank has created a helpful educational leaflet to give us some idea of what the "inflation monster" looks like.


3. Now You Too Can Live Like Ken Lewis

"If you have $4.5 million, you can now bid for a piece of Charlotte banking history," the Charlotte Observer says. Retired Bank of America (BAC) chief executive Ken Lewis listed his SouthPark home for sale last month. Real estate firm Cottingham-Chalk/Bissell-Hayes is the Realtor.

As you can see below, if you can scrape up a hefty 20% down payment, you can live like a Ken for a mere $17,815.37 a month. Just need someone to write that mortgage... but who? Who! Ho ho. That's the joke! Get it?

4. Who Will Write Your Mortgage for Ken Lewis' House?

Ambrose Evans-Pritchard, writing in the Telegraph UK, made note of the fact that bank lending in the US has contracted this year at the fastest rate in recorded history. Evans-Pritchard used figures recently cited by Gluskin Sheff's David Rosenberg. Since January, lending has fallen by $100 billion. Since the crisis began, $740 billion of credit has vanished in a record 10% rate of decline.

Paul Ashworth, US economist for Capital Economics, told Evans-Pritchard, "the reason the Great Depression became 'great' was the contraction of credit. You would have thought that a student of the Depression like Bernanke would be alarmed by this." Indeed. And it won't take long before politicians latch onto the usual suspects -- Wells Fargo (WFC), Citigroup (C), et al -- to bash them for hoarding cash.

Which, unfortunately, misses the point. Banks are responsible for a contraction in lending only to the extent that demand for loans by qualified borrowers exceeds the supply they're willing and able to offer. Two headwinds: 1) borrowers are becoming increasingly unqualified as loan standards have tightened following an extended period of irresponsible standards, and 2) credit demand is itself simultaneously waning. Again, credit availability is only half of the equation. The contraction on the demand side, which is secular, continues to be underestimated.

5. Gold Update

Whether you take up the $50,000 gold wager is up to you, but if you prefer to handle it through the anonymity of the market, then here's what I see for gold through the lens of a handful of DeMark indicators.

No change from prior updates. A TD Sequential sell signal remains in place with gold having challenged the TD Sequential risk level at 1231, but not qualifying a break of it. This sell signal is active for five more quarters following the current one.

We're on bar 8 of a potential TD Sell Setup. For perfection the setup rules require the high of February or March to exceed the high in December. Hey, we could make $50,000 on that!

The weekly has printed through bar 11 of a potential TD Sequential sell signal. The close of bar 13, once we get there, will need to exceed the close of bar 8, 1177.63.

Bar 7 of a potential TD Sell Setup. For perfection, either Friday or Monday will need to exceed Wednesday's high, 1127.25. An overlapping TD Sequential sell signal has been in deferral since December 3. To record we eventually will need a close above 1191.80.

Depending on your time frame, there are a lot of ways to apply the DeMark analysis above within the context of those levels.
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